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Why is the slowdown not so bad
Via Mark Thoma, the highly intelligent Tim Duy offers an explanation. Here's one small bit:
The impact of the consumer slowdown is partially offshored, a point which I think deserves greater attention. This shifts job destruction to an overseas producer.
Most important, in Duy's view, are the ongoing injections of liquidity from abroad. And here's a new NBER paper on the sources of the great moderation; the abstract reads:
The remarkable decline in macroeconomic volatility experienced by the U.S. economy since the mid-80s (the so-called Great Moderation) has been accompanied by large changes in the patterns of comovements among output, hours and labor productivity. Those changes are reflected in both conditional and unconditional second moments as well as in the impulse responses to identified shocks. Among other changes, our findings point to (i) an increase in the volatility of hours relative to output, (ii) a shrinking contribution of non-technology shocks to output volatility, and (iii) a change in the cyclical response of labor productivity to those shocks. That evidence suggests a more complex picture than that associated with "good luck" explanations of the Great Moderation.
Other work suggests that superior inventory policies, and information technology, have smoothed out slowdowns. It might also help that wages have lagged productivity for some time down; negative shocks might lead to less unemployment than otherwise would be the case. Here's a look at the international evidence, which shows a moderation across many countries and points a finger at monetary policy and inventories. Jim Hamilton looks at oil and the great moderation; read here too. Circa Jan. 2007, Mark Thoma thought financial innovation was not the answer.
I don't think it is crazy to cite "globalization" as the best single-word, seat of the pants response. But for any longer treatment, the answer is quite complex.
Posted by Tyler Cowen on July 19, 2008 at 09:51 AM in Economics | Permalink
Comments
You're the economist and I'm not, but I wonder why you quoted Tim Duy's number 2 explanation, which leads to "'globalization' as the best...response" and not his third and 'perhaps most important':
3. Perhaps most importantly, however, is the massive liquidity injections from the rest of the world, or what Brad Setser calls “the quiet bailout.” In the first half of this, global central banks accumulated $283.5 billion of Treasuries and Agencies, something around $1,000 per capita.
To me this would suggest "foreign government intervention" as the best three-word, seat of the pants response, no?
Posted by: tom s. at Jul 19, 2008 11:54:59 AM
Damn. I do wish I could delete my comments sometimes.
Obviously you do mention it, but you differ in your conclusion...
Posted by: tom s. at Jul 19, 2008 11:56:26 AM
The impact of the consumer slowdown is partially offshored, a point which I think deserves greater attention. This shifts job destruction to an overseas producer.
By the same token the impact of tax rebate is partially offshored when one spends it at Wal-Mart loading up on Chinese junk.
Posted by: mik at Jul 19, 2008 12:17:55 PM
My thought is 'give it time.' If he's saying this 2 years from now, I'll be surprised. Or go visit Riverside. There are a lot of people who are recently unemployed who are going to stay that way for a very long time. That number is going to get larger. It sucks to watch it.
Posted by: jdd at Jul 19, 2008 12:57:23 PM
I think part of the issue here is inflation. Economists concentrate on core inflation, which excludes energy and food. Real people spend a lot of money on food and energy. These prices have been going up for quite a while now. Rich people on TV are not affected as much by these costs.
Steve
Posted by: steve at Jul 19, 2008 1:52:25 PM
Globalization because it requires more sensitivity to synchronization and periodicity in supply and demand.
Posted by: Michael F. Martin at Jul 19, 2008 2:22:02 PM
"Economists concentrate on core inflation, which excludes energy and food."
What leads you to believe that economists concentrate on core inflation? That statement seems bizarre.
Posted by: Mercutio.Mont at Jul 19, 2008 5:48:34 PM
Why is everyone ignoring the role of Government transfer payments? Already by the late 1950's economists were talking about the role of "automatic stabilizers" in moderating business cycles. They haven't declined since then. Take a look at the BEA personal income data. Government transfer payments have gone from 5.8% of personal income in 1959 to 14.6% in 2007. Wage income may decline in recessions but GTP continue on their upwards trajectory. That seems like a better explanation for the Great Moderation than the genius of central bankers, which seems less impressive than it used to.
Posted by: Phil P at Jul 20, 2008 5:40:31 PM
Why is everyone ignoring the role of Government transfer payments? Already by the late 1950's economists were talking about the role of "automatic stabilizers" in moderating business cycles. They haven't declined since then. Take a look at the BEA personal income data. Government transfer payments have gone from 5.8% of personal income in 1959 to 14.6% in 2007. Wage income may decline in recessions but GTP continue on their upwards trajectory. That seems like a better explanation for the Great Moderation than the genius of central bankers, which seems less impressive than it used to.
Posted by: Phil P at Jul 20, 2008 5:40:48 PM
Happy Happy Joy Joy
Posted by: Barry at Jul 21, 2008 3:08:11 PM
"By the same token the impact of tax rebate is partially offshored when one spends it at Wal-Mart loading up on Chinese junk."
True, which is why increasing spending on infrastructure would be a better way to stimulate the economy.
Posted by: DaveinHackensack at Jul 21, 2008 3:57:01 PM
Why is everyone ignoring the role of Government transfer payments? Already by the late 1950's economists were talking about the role of "automatic stabilizers" in moderating business cycles. They haven't declined since then. Take a look at the BEA personal income data. Government transfer payments have gone from 5.8% of personal income in 1959 to 14.6% in 2007.
The reason that isn't considered a good explanation is because any potential explanation for the Great Moderation has to cite something that changed between the 1970s and the 1980s. Why didn't transfer payments stave off stagflation in the 1970s? We know monetary policy during the 1970s was lousy -- I don't know of any equivalent story for fiscal policy.
Posted by: Ricardo at Jul 22, 2008 1:44:53 AM
Posted by: Ricardo at Jul 22, 2008 1:46:18 AM
